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Wednesday, May 7, 2014

ROI etc and Business Benefits

It's tricky
ROI is a tricky matter, though it seems simple enough:

ROI: Net improvement in a ratio with the required investment for generating the improvement.

But when the "returns" are not monetized -- as they commonly are not in the public sector and non-profits, for example -- evaluating the numerator is not straightforward at all. And, in some cases even the "investment" is not monetized: What's the value of volunteer labor, insight, and experience? And, what's the value of donated environment -- facilities, tools, and the like?

The larger question: how do you evaluate project ROI when there's no real balance sheet entries for "R" and "I"?

And, ROI is a tricky matter even if you have a monetized balance sheet. Beware of the tricks and traps: Labor -- aka members of the staff, SMEs, leaders, and managers -- is carried as a liability! Ooops. Perhaps the HR folks and the CFO folks are not drinking the same water!

Keep it simple
Thus, some make ROI as an exclusively financial metric that may/may not apply in a particular situation. When there's no monetized ROI, then a "return of benefit" may be a better idea.

Benefit, used this way, could be monetized but more likely it's what you get out of the opportunity or the demand, having invested in some way. And, the investment may not be monetized either.

So ROB (return on benefit) can not in general be a ratio since there are not metric units that are compatible for forming a ratio. Consequently, it's common practice to state in functional terms what you are investing and what you expect to get back/returned.

It's never simple
And, to complicate matters, the ROI or NPV (net present value) or EVA (economic value add) may all be unfavorable, but yet the benefit essential to business success. Thus, the project focus turns to minimizing risk to return of benefit long term, while also minimizing the risk of financial impact insofar as possible.

Of course, I wrote a whole book on this business of getting value from the project